Wells Fargo Lending Program Didn’t Cheat Investors

Aug. 6 (Bloomberg) -- Wells Fargo & Co. didn’t withhold
material information about its securities-lending program from
institutional investors and isn’t liable for any losses, a
lawyer for the bank said at the end of a trial.

Blue Cross Blue Shield of Minnesota and 11 other plaintiffs
sued Wells Fargo in 2011, alleging the company marketed a risky
program as safe and cost investors millions of dollars. Wells
Fargo has denied misleading the investors and blamed any losses
on the financial crisis.

“Nothing Wells Fargo did or did not do harmed investors in
this case,” Bart Williams, an attorney for the bank, said in
closing arguments today in federal court in St. Paul, Minnesota.
“You can find yourself in a position, as Wells Fargo did, where
all of a sudden your securities are illiquid, you can’t sell
them.”

Wells Fargo misrepresented the risk and breached its
fiduciary duty to the institutional investors, causing $8.2
million in losses, Mike Ciresi, an attorney for the plaintiffs,
said in his closing argument today.

“These are nonprofits who have missions and $8 million is
an enormous loss,” he said. Wells Fargo “put its own interest
ahead of the plaintiffs,” Ciresi said.

Jury Deliberations

The jury is set to begin deliberating tomorrow. A separate
phase on punitive damages will follow if the jury finds against
Wells Fargo on the claims of breach of fiduciary duty, fraud or
deceptive trade practices.

The case is one of at least five against Wells Fargo,
brought in Minnesota, where the program was based, over its
securities lending. The San Francisco-based bank lost the first
case to go to trial in 2010, when a state court jury awarded
Minnesota Workers’ Compensation Reinsurance Association and
three foundations about $30 million. That judgment was upheld on
appeal.

Wells Fargo is scheduled for a third trial on the same
claims in March in a class action brought in federal court on
behalf of about 100 other institutional investors. Two more
cases are pending in federal court, including one by Minnesota
Life Insurance Co. seeking $40 million in damages. Those cases
are also set for trial next year.

Nonprofit Groups

The trial before U.S. District Judge Donovan W. Frank
involves allegations by Blue Cross Blue Shield of Minnesota, the
El Paso County Retirement Plan and 10 other nonprofit groups
seeking reimbursement of losses and punitive damages. Frank will
hold a separate nonjury hearing to determine losses to
retirement funds operated by the nonprofits.

“The allegations made by the plaintiffs are without
merit,” Laura Fay, a spokeswoman for the bank, said in
an e-mailed statement when the trial opened in June. “The
investments made by Wells Fargo on behalf of clients in the
securities-lending program were in accordance with investment
guidelines and were highly rated and suitable at the time of
purchase.”

The company sold most of its securities-lending program to
Citigroup Inc. in 2011, Fay said. Wells Fargo remains liable for
any damages awarded in the lawsuits, she said.

Under the securities-lending program, Wells Fargo held its
clients’ securities in custodial accounts and made temporary
loans of the instruments to brokers.

Recall Right

The brokers used the securities to support trading
activities such as short sales and option contracts. The clients
“had the right to recall their loaned securities at any time,
for any reason,” according to the complaint. Brokers borrowing
the securities were required to post collateral, primarily cash,
to use the instruments, court filings show.

“Wells Fargo promised to invest the cash in conservative
investments, which Wells Fargo repeatedly represented would be
‘high-grade money market instruments,’ where the ‘prime
considerations’ would be ‘safety of principal and liquidity,’”
Blue Cross said in court papers filed Sept. 11.

Wells Fargo “heavily invested” the collateral in risky or
highly illiquid securities such as structured investment
vehicles and mortgage-backed assets. The investors contend that
instead of making a small profit, they lost money.

‘Unlawful Conduct’

Wells Fargo engaged in “systematic, intentional and
unlawful conduct -- including breaches of fiduciary duty,
breaches of contract, and fraud,” the plaintiffs said in the
complaint. Wells Fargo continued to pursue the investments as
they began to falter, they claimed.

“Wells Fargo said it would only invest in the safest
securities,” Ciresi said in his closing argument today. “It
was supposed to be like a money-market fund.”

The allegation of consumer fraud “is simply not supported
by the evidence,” Williams, the Wells Fargo lawyer, told the
jurors today.

“Wells Fargo did not commit fraud or negligence,”
Williams said. “Care and prudence was exercised every step of
the way.”

The lawsuit particularly targets Wells Fargo’s investments
in structured investment vehicles and Lehman Brothers Holdings
Inc. Two of the SIVs in which Wells Fargo had heavily invested,
Cheyne Finance SIV and the Stanfield Victoria SIV, went into
default and subsequently into receivership. Lehman sought
bankruptcy protection from creditors in 2008 partly as a result
of losses tied to subprime mortgages.

“All of these securities, Cheyne, Lehman and Victoria, had
the highest ratings they could have,” Williams told jurors
today. “The notion that Lehman Brothers, that had been around
for more than 100 years, was going to disappear, occurred to no
one.”

The Minnesota case is Blue Cross Blue Shield of Minnesota
v. Wells Fargo Bank, 11-cv-02529, U.S. District Court, District
of Minnesota (St. Paul).